NEW YORK (TheStreet) - For almost two years, I have invested in emerging market countries, both as a bet against the U.S. dollar and because their growth rates are higher and debt levels lower than the U.S., Europe, and Japan.I am a long-term investor. I don't have either the computer power or data to compete with short-term traders. And for long-term investors, important things don't change quickly. But every so often, it is worth reassessing any strategy. I also believe there is considerable merit in the random walk theory that says all information is immediately reflected in stock market prices so the results of stock market picks are pretty random. But as a global economist, I derive undeserved satisfaction from infrequently reviewing the global economic situation and recalibrating my investments based on what I find.
The Global Economic SituationAccording to the IMF, nothing much has changed since 2009. As Table 1 shows, advanced are nations still struggling with recession, government deficits and debt while emerging nations have moved on. Ceteris paribus, this would suggest investments in emerging markets.
Hedge No. 1 - Real EstateReal estate prices are falling; sales are up. I believe this the beginning of the final real estate sell-off. How can real estate be a hedge? I don't know much about real estate, so I asked someone who does. Brad Case, Ph.D., CAIA is vice president of research and industry information for NAREIT, the National Association of Real Estate Investment Trusts. See www.reit.com . Elliott: "Tell me about the real estate cycle." Brad: "The commercial real estate market cycle is long, about 18 years; the last one was 17 1/2 years, give or take one quarter depending on which measure you use. REITs typically move through downturns quickly, but the last one was extraordinarily severe and lasted 25 months. That still leaves roughly 16 years of upturn, and we're now less than two years into it." Elliott: "How about real estate investments?" Brad: "Although REITs have gained 189% from their market bottom on March 6, 2009, they're still down 22% from their pre-downturn peak on Feb. 7, 2007. Real estate operating fundamentals (occupancy rates, rent growth, etc.) are at or just past their worst point. That means that earnings growth seems likely to be strong over the next several years as operating fundamentals improve."
Hedge No. 2 - Sin/EntertainmentI have written extensively about the economics of global entertainment . My findings are that we spend more on drinking, entertainment drugs, sex (prostitution/pornography), and smoking than any other entertainment categories. What is most interesting from an investment perspective is that some of these activities are highly addictive and consequently are recession resistant -- cigarette smoking is the best example. Drinkers will keep drinking but can choose cheaper beverages in a recession. But there are other entertainment categories that are highly cyclical. Cconsider gambling: In good times, gamblers take their families to gambling "resorts." In bad times, gamblers stay home and gamble online. Consequently, Las Vegas is in dire straits while Macau, where the global recession is a faint memory, is booming. So what do we know? Sin/entertainment is not going away, and with such a mix of cyclical and non-cyclical activities, it should be a good hedge against just about anything.
InvestmentsMy emerging market holdings are set forth in Table 3, along with their one and three-year performance. Only Korea (still down 5%) has not yet recovered all its losses from the financial meltdown. Looking over these investments, India has had a very large run-up. I am considering liquidating this position.
Hedge No. 1 - Real EstateTable 4 presents real estate options. I am not taken by the last three because of their high price/earnings ratios. FRIFX makes sense to me. With a dividend yield of 5.1% and real estate earnings expected to grow in future years, I see it as an excellent investment.